4 ms·

In the past few years, I've been a fervently anti-bank corruption, often aligning myself with the occupy wall street crowd. However, unlike most people with my

In the past few years, I've been a fervently anti-bank corruption, often aligning myself with the occupy wall street crowd. However, unlike most people with my views, I see algorithmic trading as not a symptom of, but one of the solutions to the problems in investment banking. Maybe it's because of my background in machine learning, but I view computers as a way to reduce the amounts of arbitrage opportunities and insider knowledge that can be exploited by traders to enrich themselves on the back of others. Well programmed computers are able to use NLP techniques to read thousands of news articles, reports, financial statements, government data, demographic data , analyse millions of data points, sort which ones are important, build predictive models, and do it all in a few seconds of time. A few computers can do the job of thousands of traders, do it with less bias and with better mathematically proven decisions. Nowadays every time a human trader tries to beat the market by predicting short terms swings in prices, there is a computer on the other side of his internet connection that is relying on much more information and even models of the human's own personality and biases to trade against him. This means that unless the human has inside information that is not accessible to the computer, (and I'm sure those who operate these computers try to feed them or make them infer the greatest amount of direct or indirect insider knowledge as possible ) it will tend to be impossible to beat the market. With the greater amount of information, the computers will keep the prices closer to real world fundamentals, bust bubbles before they inflate and reduce all the price swings that traders used to be able to exploit to make a profit on the back of less sophisticated investors. By making obsolete the jobs of all these traders, they are making the market much more efficient. They are automating a kind of job that didn't produced any real goods. Hopefully, pushing these people into jobs that make something real instead of skimming the top of everybody's retirement savings (I can see why those who want to be traders would be upset about this). Ah but you say, all we have done is replace humans from skimming our retirement savings by machines that do the same. This would be true if there was only one computer system competing against the human traders but there is a whole industry and they also compete against each other. Two sophisticated machines that trade against each other, will not only beat the human trader and put him out of business but reduce the arbitrage opportunity and margin each of these computer systems can exploit. Contrary to what the article states, computers that compete against each other will tend to eliminate all short term unjustified price swings and leave only accessible prices based on real company fundamentals. Only long term traders that bet on fundamentals will be able to make money and they will make more money than when they were subject to be exploited through market distortions and bubbles. This can all be proven by something called the efficient market hypothesis: There is a great explanation by Glen Whitman of Agoraphilia, that uses grocery line wait time predictions as a metaphor: http://agoraphilia.blogspot.com/2005/03/doing-lines.html http://agoraphilia.blogspot.com/2005/03/doing-lines.html See also: http://lesswrong.com/lw/yv/markets_are_antiinductive/ http://lesswrong.com/lw/yv/markets_are_antiinductive/ http://en.wikipedia.org/wiki/Efficient-market_hypothesis http://en.wikipedia.org/wiki/Efficient-market_hypothesis

Ntrails 14y ago
I find this idea that all the investment managers in the world exist simply by skimming off peoples retirement savings mind boggling. There are two main kinds of retirement savings, those where the retiree is in control of where their money goes - in which case they can choose to invest it as they wish. In an index, a company or anything else, and those where a company is investing on their behalf but with a legal obligation to pay out. Now, if the company goes bust then that is not the fault of HFTs or managers skimming. Either they failed to make adequate contributions or they simply went bust because the business failed. If you invest your money in ACTIVE MANAGERS then you'd best know who they are, what they do, and why they think they can win in a negative sum game. By definition very few actually can. HFT is not the cause of pensioners going without - that is a combination of lack of contributions (based on unrealistic expectations) and poor investment decisions. They don't prevent you from spending all your money on Apple shares and making a killing, and nor are they to blame if you invested in Northern Rock and lost everything. It is a fact that more money is spent on portfolio transaction costs for large pension schemes than any other cost. It is also true that much of it is unnecessary. But these are functions of investment choices based on active management, along with poor implementation and usually high management turnover.
- Retric 14y ago
  What a lot of people are missing is "the market" can't grow faster than "the economy" over the long term. There has been a huge influx of money into the stock market as an increasing percentage of people hoping for historical returns. Causing people to chase after ever lower returns. It's gotten so distorted that the 'smart money' practically ignores growth in favor of other games. HFT is the perfect example of this as they don't chase growth. There goal is to tax cash flows and market inefficiency. So, they leave low churn stocks like Berkshire Hathaway alone in favor of cheap stocks with a lot of turnover. If you keep your stock for an average of 10 years then HFT is meaningless to you. But, with hedge-funds often doing quite a bit of trading they can extract money without you realizing your trading. In the end it's yet another reason 401k's are growing a lot slower than many people predict. Sort of like how people expect the economy to 'recover' when it was what there remembering is an unsustainable bubble. PS: And of course Dividends are something of a special case in the above analysis.

Ntrails 14y ago

I find this idea that all the investment managers in the world exist simply by skimming off peoples retirement savings mind boggling. There are two main kinds of retirement savings, those where the retiree is in control of where their money goes - in which case they can choose to invest it as they wish. In an index, a company or anything else, and those where a company is investing on their behalf but with a legal obligation to pay out. Now, if the company goes bust then that is not the fault of HFTs or managers skimming. Either they failed to make adequate contributions or they simply went bust because the business failed. If you invest your money in ACTIVE MANAGERS then you'd best know who they are, what they do, and why they think they can win in a negative sum game. By definition very few actually can. HFT is not the cause of pensioners going without - that is a combination of lack of contributions (based on unrealistic expectations) and poor investment decisions. They don't prevent you from spending all your money on Apple shares and making a killing, and nor are they to blame if you invested in Northern Rock and lost everything. It is a fact that more money is spent on portfolio transaction costs for large pension schemes than any other cost. It is also true that much of it is unnecessary. But these are functions of investment choices based on active management, along with poor implementation and usually high management turnover.

Retric 14y ago
What a lot of people are missing is "the market" can't grow faster than "the economy" over the long term. There has been a huge influx of money into the stock market as an increasing percentage of people hoping for historical returns. Causing people to chase after ever lower returns. It's gotten so distorted that the 'smart money' practically ignores growth in favor of other games. HFT is the perfect example of this as they don't chase growth. There goal is to tax cash flows and market inefficiency. So, they leave low churn stocks like Berkshire Hathaway alone in favor of cheap stocks with a lot of turnover. If you keep your stock for an average of 10 years then HFT is meaningless to you. But, with hedge-funds often doing quite a bit of trading they can extract money without you realizing your trading. In the end it's yet another reason 401k's are growing a lot slower than many people predict. Sort of like how people expect the economy to 'recover' when it was what there remembering is an unsustainable bubble. PS: And of course Dividends are something of a special case in the above analysis.